On November 13, 2007, the Treasury Department and Internal Revenue Service published in the Federal Register temporary and proposed regulations implementing information reporting requirements for employer-owned life insurance, enacted in the Pension Protection Act of 2006. (Click here for a copy.) Our understanding is that the Service will require reporting for tax years ending after November 13, 2007, on Form 8925, to be released shortly.
For employer-owned life insurance contracts issued (or subjected to certain material changes) after August 17, 2006, the PPA both:
- imposed new substantive requirements in Code section 101(j). That section provides that, in the case of an employer-owned life insurance contract, the amount of death benefits excluded from the gross income of the “applicable policyholder” under section 101(a)(1) is limited to the sum of the premiums and other amounts paid by the policyholder for the contract. For this purpose, an employer-owned life insurance contract is a life insurance contract that is owned by a person engaged in a trade or business and under which such person is directly or indirectly a beneficiary under the contract, and covers the life of an insured who is an employee with respect to the trade or business on the date the contract is issued. (An “applicable policyholder” is generally the person that owns an employer-owned life insurance contract, or a related person as described in section 101(j)(3).) Section 101(j)(2) provides exceptions for certain employer-owned life insurance contracts if specified notice and consent requirements are met. Those exceptions depend on either (i) the insured's status as an employee within 12 months of death, or as a highly compensated employee or highly compensated individual, or (ii) the extent to which death benefits are paid to a family member, trust, or estate of the insured employee, or are used to purchase an equity interest in the applicable policyholder from a family member, trust or estate; and,
- in section 6039I, required the applicable policyholder to file an information return for each year the contracts are owned.
The temporary regulations authorize the Service to prescribe the information reporting form, effective as of November 13 for taxable years ending after that date. The proposed regulations specifically solicit comment on the following questions:
- The clarity of the proposed reporting rules and how they can be made easier to understand; and
- As a predicate for the information reporting, the need for guidance under section 101(j) concerning (1) determination of the status of insured individuals as "highly compensated employees" or "highly compensated individuals"; (2) requirements a taxpayer must meet to satisfy the notice and consent requirements of section 101(j)(4); and (3) the consequences of a section 1035 exchange of an employer-owned life insurance contract. (In general, a contract issued after August 17, 2006, in a section 1035 exchange for a contract issued before that date is not subject to these new rules.)
Comments are due by January 14, 2008.